Expand the companys quality cost report by showing the


Mercury, Inc., produces cell phones at its plant in Texas. In recent years, the company's market share has been eroded by stiff competition from overseas. Price and product quality are the two key areas in which companies compete in this market.

A year ago, the company's cell phones had been ranked low in product quality in a consumer survey. Shocked by this result, Jorge Gomez, Mercury's president, initiated a crash effort to improve product quality. Gomez set up a task force to implement a formal quality improvement program. Included on this task force were representatives from the Engineering, Marketing, Customer Service, Production, and Accounting departments. The broad representation was needed because Gomez believed that this was a companywide program and that all employees should share the responsibility for its success.

After the first meeting of the task force, Holly Elsoe, manager of the Marketing Department, asked John Tran, production manager, what he thought of the proposed program. Tran replied, "I have reservations. Quality is too abstract to be attaching costs to it and then to be holding you and me responsible for cost improvements. I like to work with goals that I can see and count! I'm nervous about having my annual bonus based on a decrease in quality costs; there are too many variables that we have no control over."

Mercury's quality improvement program has now been in operation for one year. The company's most recent quality cost report is shown below.

Mercury, Inc.
Quality Cost Report
(in thousands)
  Last Year This Year
  Prevention costs:    
     Machine maintenance 210   140  
     Training suppliers 5   15  
     Quality circles 25   80  
     
  Total prevention costs 240   235  
     
  Appraisal costs:    
     Incoming inspection 30   22  
     Final testing 155   92  
     
  Total appraisal costs 185   114  
     
  Internal failure costs:    
     Rework 110   62  
     Scrap 62   50  
     
  Total internal failure costs 172   112  
     
  External failure costs:    
     Warranty repairs 62   23  
     Customer returns 252   85  
     
  Total external failure costs 314   108  
     
  Total quality cost 911   569  
     
  Total production cost 4,110   4,510  

As they were reviewing the report, Elsoe asked Tran what he now thought of the quality improvement program. Tran replied. "I'm relieved that the new quality improvement program hasn't hurt our bonuses, but the program has increased the workload in the Production Department. It is true that customer returns are way down, but the cell phones that were returned by customers to retail outlets were rarely sent back to us for rework."

Required:

1. Expand the company's quality cost report by showing the costs in both years as percentages of both total production cost and total quality cost. Round your percentage answers to 1 decimal place (i.e 0.1234 should be entered as 12.3).

Solution Preview :

Prepared by a verified Expert
Accounting Basics: Expand the companys quality cost report by showing the
Reference No:- TGS02614334

Now Priced at $10 (50% Discount)

Recommended (92%)

Rated (4.4/5)